If your mutual fund isn’t performing up to snuff, then look at the fund manager’s style. If the stock market is growth-oriented and your manager is a value manager who looks for bargains, you may be wise to hang on. Value-style investing comes in and out of favor, and you wouldn’t want to miss the upside. Of course, if an inept mutual fund manager is the only reason you can find for the lagging performance, you can sell. Just try to wait until a fund’s performance has been impaired for at least two years in order to avoid unnecessary losses.
If a bond is doing poorly, maybe because the stock market is booming (typically, when the stock market is doing well, bonds are lagging, and vice versa), ask yourself what cost you can expect from hanging on to the bond until maturity. Compare that expense with what it will cost you to sell the bond. If interest rates rise substantially, say to 15%, and you’re hanging on to a bond paying 4%, you might well be better off selling the older issue and buying a new bond.
If a stock is struggling, look at the company. Forget about what’s happened to date for a moment. If you discovered the company again today, would you buy it? Do some future analysis on the company’s prospects. Don’t let your answer be clouded by negative feelings about the past few months or years. If you bought the stock because you believed that the company was well-positioned for a turnaround due to new and competitive products or services, sales, profits, or other facets of its financial position, hang on a bit more. The last thing you want to do is take a loss on a stock that may turn around a few days or months after you give it the boot. At the same time, if you decide you wouldn’t buy the stock again today, or some of the economic reasons that attracted you to the stock in the first place haven’t panned out, selling is okay.
Is the entire market taking its lumps? If so, your then investment isn’t immune. If one or more sectors of the stock market are taking a licking, consider the impact to your stock, bond, or mutual fund. A sluggish economy, or one that is in retreat, can play havoc with investments. Investments are long-term endeavors. Don’t sell just because of an economic downturn. You’ll take a loss.
An economic downturn can create a buying opportunity if it sends the price of stocks spiraling downward.
Of course, maybe one or more of your investments isn’t performing up to your standards. This kind of letdown happens to the best of us, and you can count on a disappointment once or twice in your investment life. When underperformance hits home with one of your investments, take a deep breath and try to figure out what’s happening. Figuring out how long to hold on to an investment that isn’t producing any growth is a challenge. You have to first determine what is keeping the investment on the rocks. The following sections offer a look at why an investment may be underperforming.
When you sell a stock, bond, or mutual fund, make sure that you find a suitable replacement and don’t leave the cash lying in your checking account, where it may be pilfered away by life’s daily expenses.
After you start investing, monitor your progress to ensure that you’re on track. Make the anniversary of your first investment your day of financial reckoning (or at least that month). When the day arrives, sit down and take an earnest look at what you’re investing in, how much you’re investing, whether or not your goals have shifted or changed completely, and whether or not you’re saving enough (and earning enough on your investments) to reach your goals. The ultimate measure of your portfolio isn’t whether or not you’re beating the benchmarks. It’s whether or not you’re reaching your goals. Are you? For example, if you determined at the outset that you needed to invest $500 a month and earn an average annual return of 9%, are you hitting your goal?
If you’re meeting or beating your goals, you’re in great shape. If you’re not, identify what’s wrong. Maybe you’re not investing enough. You may have to pay off some bills so that you can find more money in your household budget to invest. Or you may find that your 401(k) needs greater funding so you have to increase the percentage of your pay you contribute each week or month.
To ensure that your investment plan is a workhorse that’s pulling its weight, feed it. As you get raises at work, or come into “found” money — maybe a small inheritance, a bonus at work, or a tax refund — consider investing some or even all of these funds in your portfolio.
You’re investing hard-earned money, so you want to enjoy a sense of comfort and confidence in your investments’ potential to perform as expected over time. I emphasize the phrase over time because chasing short-term performance can drive you crazy.
Investments can look mighty risky if you track their performance every day. In contrast, risk tends to flatten out a bit if you look at it year to year. In fact, since the late 1920s, few classes of investments have lost money over a 10-year period. Of course, some individual investments have lost money, but the general rule applies: Holding on to investments for a longer period of time will reduce your exposure to losses. Do you want to avoid undue risk? Invest for the long-term — or, at the very least, five years. If you need to tap your investments earlier than that, stick to shorter-term cash equivalents, such as money market mutual funds (which invest in high-grade bonds with shorter maturities), certificates of deposit, and money market accounts. Learning how to gauge the market is different from thinking you can predict the market. No one —not even the most savvy broker — knows with any real certainty how well or how poorly the market will fair in the future.
